Need Smart People to Take a Stab at This Analysis!

[Brandon Hall]

Hey Everyone,

I found a house and would like some help with the analysis. I believe I am on the right track but I know there are some brilliant analysts on this site so please jump in an help!

The house is less than a tenth of a mile from central campus of a university with enrollment of 29,000 students. It is also less than a mile from the downtown area featuring bars and restaurants. The area experiences high rental demand and around 5% of homes in the area are owner occupied.

Asking Price: $337,900

5 beds, 3.5 baths, 3,743 sqft, built in 1953, heat pump, detached garage, new roof in 2007, sold in 2007 for $335,000.

Comps are valued at around $300k according to Zillow (I don't have access to MLS)

Monthly Rents: $2,500 - 3,000; Annual Average Gross: $33,000 rent

Property Taxes: $3,700

Insurance:$750

Maintenance & Repairs: $9,500

Other variable costs: 6% of rents

Vacancy Rate: 3% (College town - generally have 5-15 days before new renters move in)

Downpayment: 25%

Years: 30

Rate 4.35%

I am roughly estimating $5,000 in improvements though I will get a contractor to provide me with his/her estimate.

At the purchase price of $337,500, I am getting a cap rate of 5%, cash ROI of less than 1%, and an annual cash flow of $710.

Obviously these are horrible returns. At a purchase price of $290,000, I am still only seeing a cap rate of 6% and annual cash flow of $3,300 which is still not where I want it to be.

So is this market just bad for investing? I doubt I'd be able to get it below $310,000. How can someone purchase this house and be happy with those numbers? Did I do something wrong?

[Ned Carey]

Originally posted by @Brandon Hall:

I know there are some brilliant analysts on this site so please jump in an help! . . . Obviously these are horrible returns.

You don't need a brilliant analyst. you figured it out yourself.

You need to find less expensive areas to invest or at least higher rents relative to the price. You can flip in areas that expensive but generally they don't cash flow well.

[Chris Adams]

Your numbers are in line with mine when I run the spread sheet using rent at the low end $2,500

Using 3k rent bumps to 7%

If there is a high rate of appreciation in the area then a lower return can be justified. But I wouldn't count on that so much with this economy.

I would hate to jump rents up to $3.5k unless your certain you can get that.

If you calc rents at 3k and PP at 310k then you get 8 cap which for a very good area is acceptable.

But what will college kids do to your house

[Brandon Hall]

@Chris Adams This house is right next to two sorority houses and gets perpetually handed down to the next class. College girls tend to treat properties nicer than guys, but I agree I would need to factor in some sort of "rainy day" expense.

I doubt I could get more than $3,000/mo.

[Bill Gulley]

The figures I see on the way for you aren't numbers young guy!

You need some insight into college leasing.

If there isn't a house mother there, boys will be in there, if for just long enough for the weekend party.

Girls can be pretty bad, in over 12 years of college tenants, girls were the worst, not talking about messy, talking about nasty with all kinds of stuff flushed down the toilets. Makeup doesn't come out or off some things very well.

Being a younger landlord, expect late rents with batting eyelashes or tears, I got them too until learned to send my wife over there.

They have no credit, have the parents guarantee the lease. Put one on the lease, allow sub-letting with consent, that makes your lead tenant and parent responsible for rents. Otherwise you'll be chasing a house full of girls or tenants.

Best of luck! :)

[Brandon Hall]

@Bill Gulley thanks for the advice! I knew about guaranteeing the lease by having a parent sign it, but I didn't really think about the other qualitative factors.

Ingenious move by sending your wife to collect rents. I guess I'll have to get one of those too!

[Bill Gulley]

Do not mess with the tenants Or their friends while you're finding one of those wifey types!!!!!!

[Ray Browne]

Brandon,

Here are a few thoughts if your still interested in the property.

Is there any way to monetize the garage? Charging fall/spring semester tenants for storage during summer break perhaps? Can basement legally become a bedroom with addition of a closet? What about monetizing unused attic space, again w/ the storage idea perhaps.

Are you covering their utilities? Any chance you could map electric/gas usage if not for a semester and then bundle it in at a higher rate to make yourself some money by making it all inclusive? The parents footing the bill might appreciate the all in one-bill that way. What about rolling in cable , if it's $60 add $100 to the rent (password protect - pay per view of course).

Here's another angle I use for increasing rent, allow dogs. Especially with student I figure on more repair anyway..if I allow dogs I can always get more on the rent and I haven't been burned yet. Less than 2 dogs with no pits/mastiffs/etc. allowed.

[Ed B.]

Brandon,You're dealing with one of the most common and frustrating aspects of investing: Trying to figure out how to justify purchasing with lousy cash flow. If you insist on rejecting the purchase, because of the projected cash flow, I can almost guarantee you someone else will buy it, and though they may lose money, in 10 years they may actually make money with appreciation and by watching their expenses carefully. Your overall expenses of 51% of income seems high. You should able to keep that at 35% or less. For example, you don't need to pay a manager 8-10% to collect rents. That's an easy way to save money. I've had several college students as tenants, and overall, collecting from them is a breeze compared to my non-student tenants. I also have had very little damage done by my student tenants. Maybe I've just been lucky, but I think most of them make great tenants. This may explain why the price of this property you're considering is so high in relation to the rents. You're paying for a more stable class of tenants, where renting it will probably be very easy. Therefore, don't be so quick to moan and complain that the cash flow is not as good as other properties. If your goal is cash flow each month, this might not be good buy. But if you're looking for a relatively stress-free place to park some money and to possibly reap some appreciation in 5-10 years, it might be ideal. I've bought properties like you're considering, and in almost every case the only way I was able to justify them was by remodeling and adding bedrooms and bathrooms to increase the rental income. Students love private bathrooms, so if you can do that, it almost always pays off. You need to have a big enough lot to be able to expand, of course. Good luck!